Gold or bitcoin? Is that the question here? No not true. Both forms of money cover similar needs of their users, but have different properties. The precious metal has proven itself over centuries in the analog world, Bitcoin set out to become digital gold. I have already described the relationship between gold and Bitcoin here. Today we want to answer the question of what constitutes “hard” money – and how gold and Bitcoin fare.
We live in a soft money era. And it gets softer every day. Nobody can deny this statement. The European Central Bank defines “price stability” with an inflation rate of around two percent per year. That means: If you just leave your money lying around for 35 years, you lose half of your purchasing power: soft money. That’s one of the reasons investing is so important when thinking long-term. Those who do well can maintain their purchasing power. If you do it very well, you can expand it. If you don’t do it, you will lose.
This graphic comes from the new work of “Agenda Austria” on Bitcoin: “Money without a state”. Traditionally, we think of gold when it comes to stateless money. It is the opposite of the dollar and the euro. It’s a soft metal, but it’s hard money. It is rare, shines beautifully, is easily divisible and yet indestructible. For centuries, gold has formed the monetary basis of the human economy. Not one government decided that. It was the market. Which means: the people.
Gold: Good money is needed nowhere else as raw material
For a commodity to work well as money, it shouldn’t be all that useful for other uses. Often one hears the argument that silver is the better gold because it is also is needed in industry. But that’s the wrong angle. A raw material that is in high demand by the industry is bad Money. Because hard money is often hoarded. But hoarding a raw material that could be used productively elsewhere makes little sense.
Gold is only used in a few industrial applications. If it is used, it is mostly used as jewelry. It is not used up in the process. Much of the demand for jewelry can be equated with investment demand – especially in the Arab and Asian regions. This form of jewelry is also a type of hoarding.
Because gold has been considered valuable for thousands of years, we usually take good care of it. Because it is practically indestructible, almost all of the ounces mined in history are still in circulation – although we do not know how much gold is on the ocean floor or how much gold was buried in the forest. Around 200,000 tons of gold exist. A little more than 3000 tons are added each year. This relationship is crucial. The existing amount (the “stock”) is much higher than the amount produced each year (the “flow”). If you divide inventory by production, you get the “stock to flow ratio”.
Bitcoin gets even tougher every four years
The higher it is, the lower the potential price movements that new production can account for. Assets with a high “stock to flow ratio” are well suited as a store of value and thus also as money – as long as they have other properties such as divisibility, durability, scarcity and the possibility of easy transport. Gold has the highest “stock to flow ratio” among precious metals. But then came Bitcoin.
Bitcoin is designed as a virtual raw material, the “stock to flow ratio” of which increases every four years – whenever the production rate is halved during a “halving”. As the graphic shows, Bitcoin was already “harder” than silver, platinum and palladium in 2019. It is currently just behind gold. But since we know that the next “halving” will take place in about four years, we also know when the “stock to flow ratio” will increase. In 2025, Bitcoin will be almost twice as “hard” as gold.
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Please: That means Notthat Bitcoin is better than gold. Its mine production also declines while the total amount increases, so it is also “harder”. But slower. And as hedge fund manager Paul Tudor Jones wrote, in an environment of ever softer paper money, it is to be expected that the smaller and younger Bitcoin will make bigger leaps. Gold and Bitcoin are both extremely hard forms of money, but gold is already around ten trillion dollars – only a tenth of that in Bitcoin. Also because gold has proven itself over the millennia and Bitcoin is only twelve years old
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To the author
Niko Jilch is a business journalist, speaker and moderator. After eight years with the “Presse”, he went to the “Agenda Austria” think tank at the end of 2019, where he worked as a research assistant in the areas of “Investments and digital currencies” and set up digital formats, such as a new podcast. Twitter: @jilnik
Disclaimer: This text as well as the notes and information do not constitute tax advice, investment advice or a recommendation to buy or sell securities. They are for personal information only and only reflect the opinion of the author. No recommendation is made for a specific investment strategy. The contents of derbrutkasten.com are aimed exclusively at natural persons.
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